India’s Solar Enterprise: Protectionist Policies and High Costs

India’s solar industry is going through a rough phase. The reasons are quite obvious—an unrealistic target of a 100 Gigawatts solar power generation by 2022. This proposed plan, along with other means of power generation, will have to feed the country’s growing demand for energy, which is projected to double in five years.

The situation has worsened with the recent World Trade Organization (WTO) ruling that disrupted the country’s solar power generation plans.

Solar power producers in India are required by law to comply with the Domestic Content Requirement (DCR) policy of the government. Under DCR, the solar industry can use only locally manufactured equipment for solar power generation (including solar cells and solar modules). Unless solar power producers comply with the policy, the government cannot guarantee purchase of energy generated by them.

In 2014, The United States appealed against the DCR at the World Trade Organization. The main objections were that the DCR violated International Trade Laws such as the General Agreement on Tariffs and Trade (GATT) 1994 and the Agreement on Trade-Related Investment Measures (TRIMs Agreement), by, first, forcing India’s solar industry to use only locally manufactured solar cells and modules, and, second providing government subsidies for the solar power producers who used locally manufactured solar cells and modules.

Last week, the WTO ruled in favor of the United States. The Indian Ministry of New and Renewable Energy responded by saying that the ruling won’t affect future plans regarding solar power generation. But India is likely to appeal the ruling.

Here are a few key take-aways from India’s solar fiasco.

The WTO ruling may turn out to be beneficial to energy consumers in India. Production and installation costs of locally manufactured solar cells and modules are higher than the total cost incurred in producing solar energy through imported solar cells and modules. Using imported equipment may benefit consumers by lowering rates. Regardless, consumers will still pay higher bills for renewables compared to coal and nuclear.

The U.S. objection to the DCR is questionable, given that a number of states in the U.S. follow similar laws (buy local) that prohibit their solar industries from importing solar cells and modules needed for power generation.

India failed to provide a satisfactory reason for its exemption from the WTO rule concerning import and manufacture of content and equipment. The ruling could have been different if India was able to provide reasonable evidence for the conflict of interest between the international trade rules on imports and the country’s domestic legal system.

This ruling complicates the commitments made by India to the climate change mitigation plans, especially the Paris Climate Agreement. The ruling will certainly alter the dynamics of development in the solar industry and its inclusion in the ‘Make in India’ campaign, which was initiated to boost the country’s manufacturing sector.

Given the inadequacy of manufacturing capability (smaller factories, undeveloped domestic supply chain, etc.) and the lack of personnel, the solar industry never would have been able to sustain production of solar energy in large quantities—such as the 100 gigawatt solar target. The DCR would have been a silent killer, for it would not have met the solar generation target without a monumental increase in bills for consumers.

Although the ruling is a blessing in disguise, it is surprising to see that the U.S. wants to protect its exports at the cost of India’s own initiatives to manufacture solar cells and solar modules. However, the question to be asked now is, if locally made solar equipment were deemed to be more expensive and detrimental to energy consumers, how much more detrimental will the imported solar equipment be, in comparison to clean coal and fossil fuels?